Roughly half of U.S. and U.K. companies push for alternative fee arrangements

In the mid-2000s, the legal industry was abuzz with discussion about an innovative cost-control mechanism: the alternative fee arrangement (AFA). The concept—in which legal departments form creative billing plans with their outside counsel in order to stray from expensive hourly rates—enticed some law departments willing to take a risk by rocking the price boat. Others have resisted embracing it. According to Fulbright & Jaworski’s 9th Annual Litigation Trends Report, which comprises data culled from 392 in-house lawyers in the U.S. and U.K., a little more than half of legal departments in those two countries use AFAs. Fifty-one percent of law departments in the U.S. reported using AFAs in 2012, a 10 percent drop from 2011 and 1 percent less than the number that reported doing so in 2010. Across the pond, 63 percent of law departments reported using AFAs in 2012, a 3 percent decrease from 2011 and a 13 percent increase from 2010.

Although Fulbright & Jaworski’s report found that the once-steady increase in law departments adopting AFAs has plateaued, experts say such arrangements aren’t a passing trend.

“They’re certainly not going away, that’s for sure,” says Otway Denny, chair of Fulbright & Jaworski’s global litigation department. “Even though our survey respondents showed a slight decrease in 2012, about four out of every 10 companies [in the U.S.] said they were going to use more AFAs in the coming year.”

Effective Option

AFA proponents encourage legal departments that haven’t yet dabbled in AFAs to give them a go—especially because there are so many different kinds that could prove beneficial to cost control and law firm relationships.

The AFA that the most U.S. respondents (46 percent) to Fulbright & Jaworski’s survey rated as most effective is the fixed fee arrangement. In this arrangement, a company enters into an agreement with a law firm for a particular part of a matter or an entire matter, and both parties agree upon the full payment ahead of time.

“These have been used more and more lately,” Denny says. “There is a certainty with fixed fees, which many clients are interested in.”

Brian Lee, managing director of CEB (formerly known as Corporate Executive Board), says fixed fees also are palatable to law firms because they frequently aren’t set in stone. “They often have a flexible collar—something that allows people to come back to the table and renegotiate if necessary,” he says.

As for U.K. respondents to Fulbright & Jaworski’s survey, 60 percent of them rated the performance-based fee to be the most effective AFA. In this arrangement, a company and a law firm agree that the firm will handle a particular matter, and if the result meets the predetermined benchmark of success, the firm will be rewarded, oftentimes with a bonus payment.

Other types of AFAs include the blended-rate fee, in which the law firm agrees to charge all of its lawyers working on the matter at the same rate, regardless of rank; the capped fee, in which parties agree on a fee ceiling for a particular part of a matter or an entire matter; and the contingent fee, in which firms are only paid if the company prevails in a case. In the latter arrangement, firms will often receive a percentage of the company’s award in the case.

Satisfied Customers

Seventy-six percent of respondents to Fulbright & Jaworski’s study said they are satisfied with the quality of work provided through AFAs. And among the companies that use AFAs, 67 percent of U.S. respondents and 50 percent of U.K. respondents say they use AFAs for at least 20 percent of their total outside counsel billing.

Kim Townsan, senior manager of legal administration at United Technologies Corp., says AFAs are “the new normal” for her company, which has embraced the concept since the late 1990s. She says AFAs comprise approximately 70 percent of her company’s outside counsel spend. “AFAs are not a fad for us,” she says, adding that she finds it refreshing that some law firms are taking more of a lead in the AFA discussion.

Puzzle Piece

Proponents emphasize that AFAs should be just one part of a company’s overall cost-cutting plan. Before a company pursues any creative billing arrangements, Townsan says it’s imperative to analyze its different spending buckets.

“This is the approach we took,” she says. “We started by analyzing our spend, and looking for areas where we had significant spend. We targeted those areas for some type of competitive bidding arrangement, and in some cases, we provided exclusivity to firms. That led to some economic advantages, such as discounted rates, as we added firms to our preferred network. And that led us to the ability to drive for alternative fees, which for us is really the way to provide predictability for our budgeting process.”

Lee expects more legal departments to turn to AFAs as they continue to have access to more spending data. But, he notes that “how you implement [AFAs] is actually much more important than just which one you choose.” For instance, he says, a fixed fee may be most appropriate for an IP or labor and employment issue in which there’s greater certainty and repetitiveness.

Denny advises both legal departments and law firms to prioritize open communication when embarking on AFAs. “Make sure everybody is aware of what the situation is and that they’re going into it totally transparent about what the arrangement’s going to be,” he says. “If you do that, both sides can look upon it as a success.”